This is the accessible text file for GAO report number GAO-07-341SP
entitled 'Understanding Similarities and Differences between Accrual
and Cash Deficits: Update for Fiscal Year 2006' which was released on
January 24, 2007.
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How Did the Accrual and Cash Measures Change in Fiscal Year 2006?
The following pages update selected information in Understanding
Similarities and Differences between Accrual and Cash Deficits (GAO-07-
117SP) and should be read in conjunction with that document.
Importantly, emphasis should not be placed on the precise numbers for
either a single year accrual deficit or the change from year to year.
Furthermore, for the 10TH consecutive year, the government was unable
to demonstrate the reliability of significant portions of the 2006
Financial Report of the United States Government, hereafter referred to
as the Financial Report, from which the data in this update were
taken.[Footnote 1]
Both the unified budget deficit--sometimes called the "cash deficit"--
and the net operating cost--sometimes called the "accrual deficit"--
declined in 2006, but the accrual deficit declined more than the cash
deficit (see fig. 1). The cash deficit declined by about $70 billion
while the accrual deficit declined by over $300 billion. These changes
are explained in the following pages.[Footnote 2]
Figure 1: Cash and Accrual Surpluses/Deficits (Fiscal Years 2001-2006):
[See PDF for Image]
Source: Treasury.
[End of Figure]
What Drove the Change in Cash and Accrual Deficits in Fiscal Year 2006?
The decline in 2006 in both cash and accrual deficits was primarily
driven by an increase in federal revenue by almost 12 percent--or about
$255 billion. Because revenue is measured similarly in the budget and
financial statements, the increase in revenue reduced both the cash and
accrual deficits.
However, cash outlays and accrual-based expenses are measured
differently and moved in different directions.[Footnote 3] Cash outlays
increased in 2006 whereas accrual-based expenses declined.[Footnote 4]
This decline was primarily driven by changes in assumptions that are
the basis for actuarial estimates for certain accrued long-term
liabilities. These changes are discussed below.
Veteran and military employee benefits:
* Veterans compensation: Veterans compensation expenses (in excess of
cash outlays) declined by over $160 billion. The large change is due
primarily to changes in the Department of Veterans Affairs' (VA)
interest rate assumptions, which are used to discount future benefit
payments. In 2006, market-based interest rates used by VA increased.
Higher interest rates reduce the present value estimate of future
benefit payments and related expenses.
* Military employee benefits: Military employee benefit expenses (in
excess of cash outlays) declined by about $95 billion in 2006. This was
primarily the result of changes in assumptions underlying the military
health benefit liability. In 2005, the military retiree health expense
included a larger increase due to changes in assumptions for drug and
other costs than in 2006. Additionally in 2006, the military retiree
health expense declined because actual experience was better than
assumed.
Insurance:
* The $50 billion change in insurance expenses (in relation to cash
outlays) is primarily attributable to the National Flood Insurance
Program. In 2005, insurance costs increased primarily due to expenses
accrued for Hurricanes Katrina and Rita, which were paid in 2006.
* Expenses (in excess of cash outlays) related to the Pension Benefit
Guaranty Corporation also declined in part because the airline relief
provision in the Pension Protection Act of 2006[Footnote 5] caused some
large plans that were previously classified as "probable" terminations
to be changed to "reasonably possible," which reduced the estimated
losses and removed them from the estimated liability.
Environmental cleanup and disposal:
* One area where expenses (in excess of cash outlays) grew is
environmental cleanup, which recorded about a $35 billion increase over
the previous year. The Department of Energy (DOE) accounts for the
largest portion of the increase. According to DOE, this increase
resulted from a variety of factors such as regulatory changes and
changes in the assumptions it uses about the timing, scope, and
technical approach used to clean up or dispose of hazardous waste. For
example, DOE's estimated costs increased significantly because of the
additional 7-year delay to 2017 for opening the permanent geologic
repository for spent nuclear fuel and radioactive waste at Yucca
Mountain.
Because accrual deficits are sensitive to changes in interest rates and
other assumptions, any large change in the accrual deficit needs to be
examined to evaluate whether it represents a fundamental change in the
longer-term consequences of today's policy decisions. Cash deficits are
also sensitive to factors unrelated to fundamental changes in policy
such as changes in dates when cash is scheduled to be paid or received.
For example, in 2006 legislation was passed to delay Medicare payments
from the last week of September 2006 into October 2006, effectively
shifting about $4 billion in outlays from fiscal year 2006 to fiscal
year 2007.[Footnote 6] However, these types of changes have been
smaller for the cash deficit than for the accrual deficit.
How Do You Get to the Cash Deficit From the Accrual Deficit?
The Financial Report includes a statement called Reconciliation of Net
Operating Cost and Unified Budget Deficit that provides a crosswalk
between the net operating cost (accrual deficit) and the unified budget
deficit (cash budget deficit). Figure 2 summarizes this crosswalk. It
shows components of the accrual deficit that are not in the cash
deficit--costs incurred, but not yet paid--such as changes in
liabilities for pensions and retiree health benefits for civilian and
military employees and future compensation for veterans. The change in
the liability is generally equal to accrued expenses less cash payments
made to cover expenses. The figure also shows components of the cash
deficit that are not in the accrual deficit--the largest of which are
outlays to purchase various capital assets.
Figure 2: Crosswalk between Accrual and Cash Deficits:
[See PDF for Image]
Source: Treasury.
Notes: Data reported in the unaudited Financial Report for fiscal year
2006. As discussed in the Financial Report, the federal government
restated its fiscal year 2005 reconciliation statement to correct for
errors that occurred during the preparation of the originally issued
statement. Because of certain material weaknesses discussed in GAO's
audit report, the restated amounts may not be reliable.
[A] Nearly all of this increase was attributable to the Department of
Defense (DOD). Because DOD's financial statements are unauditable and
the 2005 numbers were restated by a large amount, it is unclear what
exactly drove the large change.
[B] The final deficit number published in the President's budget was
slightly lower--$318.3 billion--due to subsequent adjustments. However,
we use the numbers reported in the Financial Report since it contains
the reconciliation between cash and accrual deficits.
[End of Figure]
FOOTNOTES
[1] For more information regarding the reliability of federal financial
data, see GAO's auditor report in Financial Report of the United States
Government (Washington, D.C.: Dec. 15, 2006) and page 16 of GAO-07-
117SP.
[2] These changes do not represent a change in the fundamental drivers
of the long-term fiscal outlook. For more information on the drivers of
the long-term fiscal outlook, see GAO, The Nation's Long-Term Fiscal
Outlook: September 2006 Update, GAO-06-1077R (Washington, D.C.: Sept.
15, 2006).
[3] The nature of these differences is discussed in GAO-07-117SP
beginning on page 12.
[4] While accrual-based expenses declined, in many areas liabilities
still increased as seen in figure 2. The change in the liability is
generally equal to accrued expenses less cash payments made to cover
expenses.
[5] Pub. L. No. 109-280.
[6] Deficit Reduction Act of 2005 (Pub. L. No. 109-171, section 5203,
120 STAT. 47-48 (2006)).